Based on the borrower's ability to provide and verify his or her financial statements such as income, pay stubs...etc. the borrower may choose one the loan types below:

1. Full Doc Loan - Client needs to verify everything on the loan application. Need to prove credit, employment and income, verify money source and if seasoned. A "Full Doc" program requires the most paper work and the smallest down payment (Typically 5%). You will have to supply Bank statements and tax returns (W-2s and or 1099s).
2. Stated Income Loan - or reduced doc loan. Client can afford the loan but can't verified income (i.e.. self-employed) Need to verify everything else except income. Basically you can put down any income you like but it has to be reasonable. This program gives you the chance to obtain a loan for a home without providing tax returns or pay stubs. Depending on your credit, you may still obtain a home with only 5% down. Provided that you have the reserve requirements as specified by the lender. But with these loans the interest rate does increase (this increase is dependent on your credit scoring).
3. No Doc Loan - NINA (No Income No Asset) loan. No need to verified any income and asset. FICO driven, need to have very good credit score. Low LTV. These types of loans have higher interest rates, higher fees and more down payment due to the fact that lenders can't verify clients' incomes thus higher risk to them.

The above information shows how lenders categorize clients which defines what paper works are needed when applying for loans and the interest rates clients might qualify.

Sub-prime is a category where the client may be harder to find a loan for. However, in most cases it's better because you can get more money.

Before getting into the next loan types categorized by terms such as 30-year, 15-year fixed and Adjustable Rate Mortgage, I like to to explain a little on one of the most frequently asked question regarding interest rate:

What Exactly Is The APR?

When you apply for a loan, the lender is required to tell you the interest rate (nominal rate) and the annual percentage rate, or APR.

Generally speaking, APR is the true interest rate which includes loan placement fees as well as points and certain other costs such as mortgage insurance. It does not take into account certain charges, including nonrefundable application fees, late payment charges, title insurance premiums and fees for title examination, property appraisal and document preparation. It's the net effective cost of funds. It can be used by the borrower as a standard to shop the market for the best rate and terms available.

Example: consider a loan of $1,000 for one year at 6% interest. If at the end of the year the borrower repays the $1,000 plus $60 interest, the annual percentage rat (APR) and the interest rate will be the same ($60 ÷ $1,000 = 6%). However, if the lender charged a $30 service fee paid in advance, the borrower would receive $970 instead of the $1,000 and pay $90 instead of $60. The APR would be: $90 ÷ $1,000 = 9%

In order to get a lower nominal rate, the borrower normally need to pay higher points and fees in cash. So, if you are cash stricken or planning to move within a few years, a higher APR with less cash upfront might work out better for you.

On the other hand, if you plan to remain in the house for the life of the loan, you really need to look at the APR, the lower the better, since it's the net effective cost of funds.

30-Year Fixed, 15-Year Fixed Or Adjustable Rate Mortgage (ARM), Which One Is Right For You?

The 30-year fixed, 15-year fixed and the Adjustable Rate mortgage are the most common types of home loans.

With a 30-year mortgage, you get low monthly payments, but pay more interest over the life of the loan. With a 15-year mortgage, your monthly payments will be higher, but the amount of interest you'll pay over the life of the mortgage will be lower.

With an Adjustable Rate Mortgage (ARM), your payments will vary over time. Adjustable rate mortgages typically have an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. Common ARMs are: 1/1, 3/1, 5/1, 7/1 and 10/1. Some adjustable rate loans have the a conversion feature that allows borrowers to convert their loans to fixed-rate mortgages for a fee.

ARM interest rate = index rate + margin

The index is the key to a stable adjustable rate mortgage, since the margin is fixed. Lenders based ARM rates on a variety of indexes. Also, different lenders may offer a variety of ARMs, and each may have a different index and margin. Examples of indexes are six-month, three-year or five-year Treasury securities (T-bills); national or regional cost of funds to S&Ls (11th district cost of funds of the Federal Home Loan Bank Board [FHLBB]); and the London Inter-Bank Offering Rate (LIBOR). Borrowers and their agents should ask lenders what index will be used and how often it changes. Also, find out how the index has behaved in the past and where it is published so the borrower can trace it in the future.

The amount of the margin can differ from one lender to another, but it is always constant over the life of the loan.

Caps on an ARM

Most ARMs have caps that protect borrowers from increases in interest rates or monthly payments beyond an amount specified in the note. Caps vary from lender to lender. Two types of interest rate caps are used.

1. A periodic cap limits the interest rate increase or decrease from one adjustment to the next. These caps are usually 1 to 2 percentage points or sometimes 7.5 percent of the previous period's payment amount.
2. A life cap or overall cap limits the interest rate increase over the life of the loan.

An ARM usually has both a period and a lifetime interest rate cap.

Some ARMs include a payment cap that limits the monthly payment increase at the time of each adjustment, usually to a percentage of the previous payment. For example, if the payment cap is 7.5%, a payment of $1,000 could not increase or decrease by more than $75 in the next adjustment period.

However, because payment caps limit only the amount of payment increases and not interest rate increases, payments sometimes do not cover all the interest due on a loan. This is sometimes called negative amortization, which means the mortgage balance is increasing. The interest shortage in the payment is automatically added to the loan, and interest may be charged on that amount. However, an increase in the value of the home might make up for the increase in the amount owed because of negative amortization. Some loans allow negative amortization but have a cap on the rate of negative amortization possible. Some loans prohibit negative amortization. In these cases, if a payment is not sufficient to pay the interest, the unpaid interest is forgiven and not added to the loan amount.

Many types of ARMs (more than 100) are being offered by lenders today. It is important for both the borrower and his or her agent to learn to ask questions so that they may compare loans adequately.

Which type of mortgage should you get?

It really depends on various factors and they are different from client to client. Even if the 30-year or 15-year fixed interest rates are very low, but not everyone can qualify for it. With most American families, the average time of living in one house before moving to the next house is about 6-7 years. If this is the case for you, it doesn't make much sense to stick to a 30 or 15-year mortgage. One lender representative even goes to extreme in saying that 30-year mortgages do not exist any longer! Fixed rate loans are a waste of hard-earned money on a short-term basis.

Other advantages of adjustable rate loans are: It's usually easier to qualify for an adjustable rate mortgage than for a fixed rate mortgage. Clients may qualify for larger loan amount vs. fixed rate loans, so they can buy a bigger house. Also, ask if the ARM is assumable, which means when you sell your home the buyer may qualify to assume your existing mortgage. That could be desirable if mortgage interest rates are high.

If you like to learn more, here is a good article regarding adjustable rate loan.

Of course, different clients have different needs and should pick a mortgage program accordingly. As you can see, there is a mortgage loan just for about everyone.

Next I like to explain the loan process so you will understand the steps in applying for a loan. Find out what happens after your loan application is turned in till the final step of closing. You will find out approximately how long it takes on each step of the loan process.